1. Field of Invention
This invention relates to automated portfolio selection. More particularly, this invention relates to methods and systems for automated selection of an investment portfolio based on the user""s own criteria and his relative valuations thereof.
2. Background
All stocks, in varying degrees, from blue chips to highly speculative start-ups, are risky. Although in stock market investing it is generally accepted that xe2x80x9cthe more risk the more gain,xe2x80x9d every investor must put some limit on risk when investing. In order to reduce total risk, even the least risk-averse investor should buy a large number of different stocks to construct a diversified portfolio.
Each investor has his own personal and economic characteristics which determine how much capital the user can invest, his need for cash income, and his willingness to accept risk. Since every stock has its own characteristics relating to earnings, dividends, growth potential, volatility and safety, the user should be able to construct a portfolio which is exactly tailored to his needs. The central problem every investor faces is, therefore, to find some rational systematic method of selecting this portfolio from the thousands of stocks available. Ideally, the combination of individual securities should constitute, as it were, a xe2x80x9csynthetic securityxe2x80x9d which has the set of characteristics which best satisfy his particular requirements.
This invention provides, in one aspect, an automated portfolio selection system that utilizes technological advances to solve the xe2x80x9cmixxe2x80x9d problem involved in portfolio selection. The system according to the present invention uses mathematical programming and computers to enable systematic selection, from the millions of combinations of stocks that could be bought with the capital available from a universe of candidate stocks, that combination of stocks that provides the maximum satisfaction of any particular investor""s requirements.
In one aspect, this invention provides a method of automatically selecting a securities portfolio from a plurality of securities. The method includes selecting investment characteristics and investment limits considered important for investment objectives; selecting a safety level for the portfolio; constructing a matrix having entries corresponding to (a) the selected characteristics and limits, and (b) the candidate securities; establishing an objective function corresponding to the constructed matrix; and determining the securities portfolio based on the matrix and the objective function. In some embodiments of this invention, the investment characteristics may be selected from the group comprising: dividends, rate of growth of earnings, financial strength, safety, predictability of earnings, and performance rankings provided by an advisory service. In some embodiments, the safety level is provided as a number of stocks to include in the portfolio.
The selected investment limits may relate to limitations on the amount of investment in each candidate security. At least one selected investment limit may relate to a standardized commercial rating or a measure of financial strength.
In some embodiments, the establishing of the objective function further comprises: standardizing units of all factors; and establishing a degree of importance of factors. In some embodiments, the standardizing units of all factors includes, when a factor is specified in units of xe2x80x9cdollars per sharexe2x80x9d, dividing the factor by the price. The establishing of the objective function may include, when a factor is specified in units of xe2x80x9cdollars per sharexe2x80x9d, using the actual value; and when a factor is a non-dollar factor, multiplying the factor by the price.
In some embodiments, the selected portfolio provides an optimum portfolio for a particular investor based on the investor""s risk-tolerance and revealed preferences for cash income and capital appreciation.
In another aspect, this invention provides a computer-based system programmed to perform the methods of this invention.
In yet another aspect, this invention provides a method of revealing relative effects on achievement of an investor""s objectives of adding or subtracting one dollar of investment in each security in that investor""s portfolio.